Saturday, August 24, 2019

Aug 24th Amazon fires, media distortion, and unintended consequences

My Brazil experience is now coming up on 20 years. Much of that time in
Mato Grosso and the transitional rain forest.

I am not an environmental expert. However, I am more of an expert
than many on twitter this past week. When I saw images of elephants,
kangaroos, and koalas in the Amazon, I knew the media had gone too far.

I think Taylor Swift has it right:
"You need to calm down, you're being too loud
And I'm just like oh-oh, oh-oh, oh-oh, oh-oh, oh-oh (oh)
You need to just stop"

I wish some of the movie stars that are so concerned about the
Amazon would come down for a tour. I would love to educate them. 

I watched Bill Maher this morning. I like him. I do not always
agree with him, but I like his style. Friday night he too showed
his ignorance about Brazil. He showed the common white man
tendendency to look at Brazil as a colony.

"Someone should just buy the Amazon" Someone like George Soros.
This made me angry and I am a fake Brazilian. I am a guest here. 

Brazil has been colonized for centuries by Spain, England, and
Portugal. Brazil has had their resources stolen time and time again.

Here is a newsflash. THE AMAZON IS NOT FOR SALE.
The Amazon is Brazil's.  Period !!!!
If you do not undertsand this, go back and read Brazil's
history. They have a right to be Xenaphobic about this.

Obviously the Amazon is important to the whole world.
However, the northern hemisphere countries are trying to
dictate to Brazil how the Amazon should be preserved.

I would suggest the following, instead of trying to tell
Brazil what to do and criticize them, they should offer
an open invitation. "Hey Brazil, if you need some
help with enforcement or resources, give us a call"
Do not tell BRAZIL what they should be doing. 

I wrote in my July 2018 newsletter on how the trade
war is likely to cause unintended consequences in the
market place and where crops are grown.

I wrote in my June 2019 newsletter about how new lands
are being cleared in northern Mato Grosso. An example
was 5000 ha of forest was purchased and now 1000 ha was
being opened for rice production. Soybeans will come

After the updated forest code of 2012 that made clearing
of forest more restrictive and required 80% of the area
be left as permanent reserve and 20% for crops, the
clearing of land has been very subdued. In my opinion,
the new forest code was too restrictive. 
The 80/20 line is north of 13 deg S latitude.

The new administration pulled the environmental oversight
officials out of many Amazon locations. This agency is
known as Ibama and they send out fines and impound
soy grown on illegally deforested tracts. 

I can give an example of a producers frustration with
the system. I know an American who cleared land
in NE MT back in early 2000s. He then sold the land
to a Brazilian in about 2014. After he sold it, he found out
that a tract of the farm was impounded because he cleared
it after a specific date even though he had license to clear it. 

The fine then starts going back to beginning with fees and
surcharges. A small fine can quickly become millions
of Reais. He paid the fine and assumed all was good.
Example would be, you get a speeding ticket, pay the fine,
and you are good to go. 

In this case, you need to re-record that your land is free and
clear. He did not know that. He then got another new fine.
Also, he is unable to complete the contract for deed sale of 
the land which until today remains unsettled. 
This is the kind of nonsense that Bolsonaro and his
admin are trying to help producers with. Solve the old
problems on the books so farmers can move forward. 

Unintended consequences

In 2018 we have a USA/China trade war.
China responds with new tariffs on USA ag

China looks to South America to fill in their
soybean needs. The port premium goes to
US$ 2.50 over Chicago futures in Sept at the
same time the FX BRL goes to 4.20:1 because
of the Brazilian election. It was the best of
times for Br farmer. Due to the lateness of the
boom, he was unable to increase soybean area
to the level the domestic market was telling him to.

So here we are a year later, BRL is back to 4:1,
we have soybean prices making new highs in Brazil,
soybean port premiums are + 1.50 USD over Chicago
and we are surprised by some smoke in the Amazon?
Come on- get a clue or atleast buy my newsletters
so you know what is going on.

I am pleasantly surprised there is not a lot more
smoke in the Amazon. This is normal.
It is August, it is burning season.
The rains come in less than three weeks, if you 
are going to burn, you need to do it now !!!!!
It is too wet the rest of the year !!!!

Back in 2003-2005, now that was smoke.
We are probably 10-15% of peak burning 
like that of the early 2000s. What is the major
difference?  We did not have any social
media back then !!!


Over the years I have heard a common theme
among farmers as to how to solve this.

Basically this would be a Brazilian CRP program
for the reserve areas. This would incentivize the
Brazilian land owner to self monitor. 

For those who do not know what CRP is in USA,
it was the conservation reserve program that started
in 1986. It took highly erodible and wetlands out
of production for periods of up to 10 to 15 years at a time.

It was started to help bail out the banks and broke
farmers from the 80's. It morphed into a farmer
retirement program. It later morphed into a fixed
income investment for small and medium size
investors that could get  4-6% ROI from the 
government. The investor would buy the land 
and the contract went with.  

In this environment of low interest rates, CRP
as part of your portfolio has been quite attractive.
Also, many use this land for hunting in the fall and
it tends to be a nice tax deductable recreational
trip to check on the CRP each year. 

In Mato Grosso and elsewhere, we have 3 tiers of
reserve requirements for land. 

20% reserve 80% open  Cerrado
35% reserve 65% open  Cerrado
50/50  forest areas and Mato Grosso law
80% reserve 20% open new forest code north of 13 deg S lat

There has been talk about paying land owners on their reserve
area to preserve it -try to disincentivize its deforesation. 

On paper this would work. It would take a big fund.
It also would take a FSA office type agency in each
county to oversee. 

In the short term, it would throttle back expansion.

However, in the long term, I think the program would
follow the evolution of the CRP program in the USA.
They mean well in the beginning.
But once consolidation of large blocks or groups of
farms start being bought out by investment funds
just for the revenue stream, one might regret what it
looks like after 10 or 20 years of investment bankers
calculating current present value of a 30 or 50 year
Brazilian CRP contract.  In a negative interest
environment, the land values would explode off the charts.

So I repeat, Bill Maher, Amazon is not for sale. 

I will close with a bit of irony and maybe a bit
of a paradox for some.

You know what is saving the Amazon today?


yes, African Swine Fever in China.

If it were not for this disease and China's animal
rations dropping by 10 to 15 million tons, we would have
had a hell of a lot more smoke in the Amazon this year.

China is a major factor as to how this all unfolds in
coming years. 

As I stated at the beginning; CALM DOWN

"You need to calm down, you're being too loud
And I'm just like oh-oh, oh-oh, oh-oh, oh-oh, oh-oh (oh)
You need to just stop"

I am happy to discuss this, but I do charge for my service.
The rate is US$ 500 per hour.

No exceptions for journalists. 

Go to my website and push some buttons if you
want to talk. 

Have a great week.

I can't wait for the rainy season to start in 3 weeks.